By:
Michael Vidovic, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary:
• New Relic, Inc. (NYSE:NEWR) provides digital products across the
globe that focus on the storage and analysis of data. The company’s services
extend from server-based applications and includes monitoring across phone
devices.
• New Relic recently
announced a definite agreement to begin operating in Tokyo as part of a joint venture.
This announcement allows NEWR the opportunity to reach the far eastern
population and provides a larger window into the east Asian territories like
China.
• The company also
unveiled the kickoff of its FutureStack along the western coast of the US, and
the project aims to discover new technologies and to develop the DevOps space
further.
• NEWR achieved 52-week
highs in May but has since trailed downwards following an average Q1
performance, and concerns in the company’s margin expansion.
Key
points:
New Relic announced Q1 2019 earnings with slightly
above consensus revenue metrics paired with consistent margins. However, there
has been a major internal selloff the of the stock mainly due to the company
reaching its all-time high recently. ARR has decrease in the last 6 months, but
the continuing 85% gross margin and increasing EBITDA ends any concerns about
NEWR’s future profitability.
New Relic’s work
agreement with Amazon has been very successful since NEWR joined Amazon’s
Serverless Application Repository and has allowed for quicker product integrations
and a bring to market time horizon. By March New Relic had over 28 AWS
integrations, and this increase is expected to continue in the DevOps and
digital migration spaces.
New Relic is well
positioned to capture the continuing market shift towards cloud services and
serverless computing with global cloud expenditures being over $125B in 2017.
New Relic had US focus prior to the cloud technology revolution, but after
partnering with AWS and seeing the major increase in east Asian business the firm
looks to become a global company.
New Relic is expected to
be hurt mildly by hybrid solutions companies because they offer the opportunity
to shift from the classical method to the new one rather than NEWR’s preferred
approach of just upgrading all at once. NEWR would have to make its own
proprietary platform to meet this competition, and with the industry trend
clearly shying away company owned server technology, this is far more of a
short-term headwind in major countries. In third world countries the hybrid
system could be more off an issue, but at present NEWR hasn’t seen significant
concern in this area.
What
has the stock done lately?
Since NEWR reported 4Q
2018 earnings, the stock has remained above $95, but concerns over NEWR’s
investment decisions has led to short term declines. On August 8th,
NEWR announced a new joint venture in Tokyo and for continued investment in the
Asian market. In addition, the kickoff of its FutureStack event series was
announced in September, and both news announcements paired with an average
earnings announcement left the stock trailing its earlier success.
Past
Year Performance: NEWR has been on a tear over the last 12
months with the stock increasing 108.35%. However, the stock has been flat over
the last 6 months due to internal selloffs and a Q1 reporting a decline in the
annualized dollar based net expansion rate. The company is still trading at a
90x EV/EBITDA multiple, and operating margin growth has been lighter than
expected.
Source:
FactSet
My
Takeaway:
New Relic, Inc has been a
blessing to watch and is a perfect demonstration of cloud technology’s
disruption of the tech industry. The capabilities are so vital for a low
up-front cost customer that New Relic has been able to secure 55% annual
recurring revenue metrics for the past year. The stock is trading at its peak
historical level, but the company just recently went public and looks
temporarily recessed from an unusually high management selloff of stock.
Overall, the firm operates in a fantastic market and has achieved consistently
high margins to drive their growing business.
